Holman and Gilbert: Pass STOCK Act to Create Fair Trading Practice

It comes as a stunning surprise to most Americans when they learn that the law against insider trading that could send you and I to prison for violating it does not apply to Congress — at least no one is clear whether the law applies to Congress — and no enforcement actions have ever been taken against Congressional insider trading.

Under current law, insider trading is defined as the buying or selling of securities or commodities based on nonpublic information in violation of confidentiality — either to the issuing company or the source of information. Congressional officials and employees in the course of official business, it is often believed, do not owe a duty of confidentiality to these sources and thus are not liable for insider trading.

Insider trading is the practice of trading a company’s stocks or securities for personal gain by individuals with access to nonpublic information about the company or financial markets. It is illegal in almost every industrial country in the world, and it poses real dangers to the integrity of companies, the economy in general and overall public trust in our system. For example, insider knowledge of a pending business transaction can be exploited by an unscrupulous individual by raising the costs of capital for securities issuers, thus reaping tremendous profit for the insider at everyone else’s expense.

There is considerable evidence that Congressional insider trading is a problem. About a third of the Senate and half of Congress are active traders. Many of these Members and staff buy and sell stocks in the same fields for which they have direct oversight. More than a dozen Senators on the Armed Services Committee, for example, own stock in businesses they regulate. LegiStorm documented that at least 72 Congressional staffers last year traded in businesses they oversee — and that tally leaves out the 15,000 staffers not subject to personal financial disclosures.

More suspicious yet is the phenomenal success rate of Congressional traders. Studies have shown that Senators enjoy a 12-point higher rate of return than the market, and House Members see a 6-point higher rate of return. Either these Members are geniuses when it comes to the stock market, or they know something we don’t and trade on it.

Jack Abramoff, the disgraced lobbyist who is now on a book tour, confirmed what many of us already suspected: He admitted that about a dozen Members of Congress and staff had boasted to him about their ability to get away with insider trading.

Still worse, there is a growing concern that many lobbyists and stock traders comb the halls of Congress precisely to get such insider tips from staff — known as “political intelligence consultants” — enriching themselves and their clients with this same type of confidential information, also without penalty.

For years, legislation designed to remedy this problem languished in Congress. Democratic Reps. Louise Slaughter (N.Y.) and Tim Walz (Minn.) regularly introduce their Stop Trading on Congressional Knowledge Act to outlaw Congressional insider trading, only to be rebuffed by their colleagues.

Finally, a few weeks ago, “60 Minutes” did an expos&eacute; of the abuse. House co-sponsors of legislation to end Congressional insider trading jumped from nine to 131, and the number continues to grow. The Senate, which never even had a bill, now has two. The Senate Homeland Security and Governmental Affairs Committee held a hearing a week after the bills were introduced. The House Financial Services Committee, headed by Rep. Spencer Bachus (R-Ala.), who was singled out in the “60 Minutes” report, held a hearing on the long-stalled Slaughter-Walz bill Tuesday.

Adding insult to injury, though the insider trading law has never been applied to Congress, these hearings are producing statements from the House Ethics Committee, the Securities and Exchange Commission and some academics that the existing law really could apply to Congress, if properly interpreted and enforced.

It is reassuring that some of the enforcement officers are now signaling that they may indeed apply the law against insider trading to Congress, but let’s not take these signals as an excuse to once again kill the legislative fix. Confusion and disagreement reign over this point. The STOCK Act would make it clear and unambiguous that Congressional insider trading is illegal.

Just as importantly, there is no body more privy to a flood of insider information on economic trends than Congress, so the legislation would also require near real-time disclosure of trading activity by Members, staff and those who do business with Congress as a means to enforce the law.

The time to pass this legislation is now. With the federal government assuming an ever-larger role over the economy under the watchful eye of Congress, it is imperative that Congress act quickly to assure the nation that the government’s involvement is solely in the public’s interest.

Craig Holman is government affairs lobbyist for Public Citizen. Lisa Gilbert is deputy director of the group’s Congress Watch.